A$ leads risk currency decline; greenback shows signs of life after Fed-induced slide

The Australian dollar led commodity currencies lower with the AUDUSD pair falling back below the 105-figure after peaking above 106 US cents on Friday. Given the Aussie dollar's high yielding credentials, we're likely to see the local unit's movements more pronounced than its commodity counterparts the CAD and Kiwi, which was clearly displayed overnight. Sterling bucked the trend with cable remaining supported above $US1.62 but stopped short of breaking 4-months highs just above $US1.63. The Euro softened but remained supported above $US1.31 with little in the way of fresh directives to spur a move from its current range. While markets play the waiting game to see if Spanish PM Mariano Rajoy will ask for a bailout in exchange for Mario's Draghi's grand bond buying scheme, it's clear Euro buoyancy is tentative at best with reluctance from Spain likely to continue pushing bond yields higher while promoting a softer Euro.

Despite moderate easing across risk currencies this week, the overall market demeanour remains US dollar-negative, with the latest commitment of traders report shows US dollar positioning turned net short for the first time since August 2011 as of Tuesday last week. A latter week risk-offensive added to the short-side appeal of the U.S dollar which we anticipate will be strongly reflected in next week's COT report. If we look past the immediate psychological merits of QE3, there's a valid case to suggest the greenback may not need to endure an extended period of decline seen after Fed intervention in the past. Overall, recent price action shows the Fed have appeased short-term expectations, however, unlike the Fed's first two rounds of quantitative easing, we cannot draw any finite conclusions on the total size and duration of QE3, accept the Fed will buy mortgage-backed securities at a rate of $US40 billion per month and will continue to do so "if the outlook for the labor market does not improve substantially, "in the context of price stability." It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously. In addition, should the U.S data pulse take a positive turn, whether you attribute these to QE3 or otherwise, markets may begin to price-out QE3, suggesting the impact will be softer than that of the Fed's previous stimulus efforts. Nevertheless, it's a question of timing and it would be a bold move to begin preempting a material shift the upside for the greenback at this very early juncture.

The day ahead will see the RBA policy meeting minutes for the September meeting take centre stage. In the meeting the board left interest rates unchanged at 3.5 percent with the ensuing statement taking a tad more of a neutral tone than markets had priced in.  The statement acknowledged weakness from recent Chinese indicators, which is a delicate downgrade from the August statement which noted "China's growth has moderated to a more sustainable pace, but does not appear to be slowing further."  In essence, the statement justified why interest rates are below their medium term averages, rather than building a case for additional cuts to the official cash rate. Also on today's docket is Chinese house prices scheduled for release at 11.30 am AEST, which serves as a barometer of domestic demand in the region.

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